Calling Taxing Matters - LLC Annual Meeting Costs

[L-1]

I have two California LLCs, the operating agreements of which require that annual meetings be held to approve expenses, review future plans, look at distribution of profits, etc. When they were first formed, I vaguely remember my then attorney commenting that one of the benefits here was that I could hold these meetings anywhere I wanted - Paris, Rome, London, etc., and write travel costs off as a business expense. I paid no attention to his comment at the time.

This year I took two road trips, one from Southern California to British Columbia and another to Texas. If I held my annual meetings in those destinations (one for each LLC) and separated any costs for personal business conducted along the way, am I good to deduct mileage, food and motel as business expenses for my annual meetings?

Thanks,

L-1

[budwad]

am I good to deduct mileage, food and motel as business expenses for my annual meetings?

Mileage for your trip is a yes but you have to deduct that which was for personal use. Food is a no (you do have to eat whether on business or not) unless you were entertaining some business personal. Motel is a yes but technically you have to proportion what percent was personal and what percentage was for business.

[pg1067]

This year I took two road trips, one from Southern California to British Columbia and another to Texas. If I held my annual meetings in those destinations (one for each LLC) and separated any costs for personal business conducted along the way, am I good to deduct mileage, food and motel as business expenses for my annual meetings?

Are you doing anything on these hypothetical trips other than conducting an annual meeting? Who else besides you would be attending these hypothetical meetings?

[Taxing Matters]

I have two California LLCs, the operating agreements of which require that annual meetings be held to approve expenses, review future plans, look at distribution of profits, etc. When they were first formed, I vaguely remember my then attorney commenting that one of the benefits here was that I could hold these meetings anywhere I wanted - Paris, Rome, London, etc., and write travel costs off as a business expense. I paid no attention to his comment at the time.

Was this attorney a tax attorney? I suspect the answer is no.

There are two parts to this. First are the technical rules for deducting travel expenses, which have been narrowed starting 2018 as a result of the Trump tax bill passed at the end of 2017. The rules for that are discussed in some detail in IRS Publication 463. Note that there are considerable restrictions when the travel involves going outside the U.S.

Second, there is the more general rule that deductions are only allowed for those expenses that are "ordinary and necessary" for the operation of the business. Under this principle, those expenses which cannot be justified for a business purpose will get disallowed. For example, suppose that you are the only member of your California LLC, that the LLC only does business in CA, and the LLC grossed $50k in revenue and after expenses other than travel for the annual meeting nets $5,000. You then arrange for an annual meeting with travel expenses that you claim are $3,000 to go to Maine. In an exam the IRS might well challenge what the business purpose of having the meeting in Maine was when the LLC would have been able to hold the meeting in California at much less expense and not end up spending over half of its net income. I mean, a LLC member meeting with just one member takes only minutes to conduct, after all. So what is the need to spend the money to do it on the other side of the country. What possible benefit is there to the LLC itself for doing it? It starts to look like the real purpose of the trip was really personal, not business. While it tends to be the more extreme situations that draw the ire of the IRS, you do need to be careful to avoid those situations where an objective outsider would easily say that the expense wouldn't cut it for a business truly seeking to maximize its profit. If someone outside looking in would readily see it as a play to deduct a fun personal travel trip that's going to certainly be a red flag to an IRS auditor, too.

Food is a no (you do have to eat whether on business or not) unless you were entertaining some business personal.

Meal expenses incurred during business travel are indeed deductible too, though subject to a 50% limit and some other rules. See the discussion of that in IRS Publication 463.

[L-1]

Second, there is the more general rule that deductions are only allowed for those expenses that are "ordinary and necessary" for the operation of the business. Under this principle, those expenses which cannot be justified for a business purpose will get disallowed. For example, suppose that you are the only member of your California LLC, that the LLC only does business in CA, and the LLC grossed $50k in revenue and after expenses other than travel for the annual meeting nets $5,000. You then arrange for an annual meeting with travel expenses that you claim are $3,000 to go to Maine. In an exam the IRS might well challenge what the business purpose of having the meeting in Maine was when the LLC would have been able to hold the meeting in California at much less expense and not end up spending over half of its net income. I mean, a LLC member meeting with just one member takes only minutes to conduct, after all. So what is the need to spend the money to do it on the other side of the country. What possible benefit is there to the LLC itself for doing it? It starts to look like the real purpose of the trip was really personal, not business. While it tends to be the more extreme situations that draw the ire of the IRS, you do need to be careful to avoid those situations where an objective outsider would easily say that the expense wouldn't cut it for a business truly seeking to maximize its profit. If someone outside looking in would readily see it as a play to deduct a fun personal travel trip that's going to certainly be a red flag to an IRS auditor, too.

I didn't know how to word it in my question, but that is exactly what I was looking for. Thanks Taxing !

L-1